Rising to the Challenge

As c-stores in food deserts face scrutiny,&nbsp;retailers grapple with doing the healthy thing.

Rural Efforts

While an inner-city neighborhood may be the stereotypical food desert—and in fact, about 82% of these areas are urban—rural communities are not immune.

“In a rural area ... you have a lower population density, so you don’t have enough people to support a store on every corner like you used to,” says Mark Wright, assistant vice president of sales for The Nielsen Co.’s retail, restaurant and estate division. “So you’re more likely to find them shopping in supercenters, Walmarts and bigger stores that are farther apart than in a store on Main Street that no longer exists.”

It is precisely this dynamic that played out in Brewerton, a town of approximately 3,500 in north central New York. The local superette closed its doors after a Walmart supercenter opened 5 miles away. After town officials heard that local retailer Nice N Easy Grocery Shoppes was planning on knocking down an existing store and rebuilding it, they approached the chain about repurposing the site.

“They said, ‘We would love to have Nice N Easy in town, but we would like you to have a more extensive line of meat products, produce and cereals’—some things we don’t stock a lot of in a typical c-store,” says John MacDougall, CEO of the 81-store chain, based in Canastota, N.Y.

It was a challenge Nice N Easy, whose stores were already produce-centric, was willing to take. Opening this summer, the site will be 6,500 square feet and have an expanded grocery offering, including packaged red meat, and a produce and frozen section double the size of the typical Nice N Easy store. It will also sell more paper products and pet food. The store will include the chain’s Easy Street Eatery made-to-order sub offering. The chain worked with Nielsen’s Claritas division for site analysis and to fine-tune the assortment. (See “So You Want to Serve a Food Desert” on p. 52.)

To supply the site, Nice N Easy is in discussions with several wholesalers who typically serve small grocers, including the independent grocery store chain IGA, based in Chicago. “They are looking to downsize to smaller stores, into the format we’re talking about,” says MacDougall. “So there’s a meeting of minds that says maybe a 6,000- to 8,000-square-foot store is a good idea, particularly in markets that have been left behind because a Walmart went in 10 miles down the road.” However, this midsize format was somewhat tough for some of Nice N Easy’s supplier partners and even employees to embrace. “For some people, that sell has been pretty tough,” says MacDougall, “because if you really know the c-store business, in many ways, most stores out there have begun to shrink down, carrying less products, and turning into cigarette, candy and snack stores. ... And [here] we’re going in the opposite direction.”

While operating with a Walmart supercenter in the distance might give some retailers pause, Nice N Easy is confident it can compete. MacDougall points out that the defunct superette, with a butcher and large produce section, had much higher overhead. Its frozen section was too small. And the Nice N Easy will be better located, on the exit of an interstate, with gasoline and diesel as traffic drivers.

Sonja Hubbard, president of E-Z Mart Stores Inc., Texarkana, Texas, is a NACS Nutrition Campaign Committee member. A few of her 306 sites sit in rural food deserts, where many customers rely on food stamps. Hubbard says E-Z Mart is still figuring out its approach.

“We’ve done some resets, added items and are trying to get some things going in some select stores,” she says via e-mail. “The items have met with mixed sales and we’re just now in the process of revamping, refocusing and trying to see what is working and what isn’t in an effort to enhance [it].”

One item that has sold “relatively well” is frozen chicken breasts, which have an $8.99 price point. Most of those purchases have been made with food stamps, according to E-Z Mart.

A Desert with No Road

One serious hurdle c-stores in a food desert face, whether in rural or urban markets, is distribution—not necessarily because of the location itself, but due to lack of access to fresh produce or other healthful items in a traditional distributor’s arsenal.

At the beginning of its pilot, the Minneapolis Healthy Corner Store Program teamed up with Bix Produce to deliver fresh fruits and vegetables to participants. But because orders were smaller than for a typical grocer, Bix had to break down a case size—the cost of which was passed on to the store owners in the form of a $150 order minimum. “The retailers were willing to pay a little more, but the bottom line was it still turned out to be too expensive,” says Ali, the program’s project specialist.

Project planners continue to work on the procurement piece, while retailers are back to purchasing produce at grocery stores, mass merchandisers and club stores such as Sam’s Club and Restaurant Depot. Kablaoui checks prices at all the stores on his 20-mile drive to the store every day to see who has the best price. And for him it goes beyond fresh produce. His shelves are lined with cereals and other staples bearing Walmart’s Great Value private label.

While seemingly necessary, this tactic might be perpetuating the problem, says Ron Coppel, senior vice president of business development for distributor Eby-Brown Co. LLC, Naperville, Ill. “[They] wouldn’t have a supply issue if they would trust a supplier to bring products to them, stay put in their stores, and do a better job of marketing their stores to their customers,” says Coppel. “They create supply issues for themselves by thinking they will save a few pennies by driving back and forth.” In some of the healthy corner store initiatives, operators are joining together to reduce the cost of distribution—sort of an inner-city buying group. Others are looking to groups already established by independent grocers to let them in on the hub.

“We’re a high-cost channel to serve,” says Montgomery. “For a produce truck to stop, with fuel at $4 a gallon in Chicago, you’d have to be doing a lot of volume. So you either have to pick it up, or get that delivery combined with other deliveries.”

But Is There Demand?

For many retailers—small and large—adding healthy foods to the mix remains a risk.

“They’re all throwing out produce that doesn’t sell,” says Page of the Hartford Food System participants. “But when a larger retailer does it, it doesn’t hurt quite so much. As a percentage of the total, it represents a much smaller percentage. If I have to throw out a case of strawberries, and it’s one of eight fruits I carry, then it’s going to hurt.” There is also some debate about classic supply-demand economic principles. Do c-stores have a responsibility to foster a healthier America?

“I don’t like the word ‘junk food’— this gets to my philosophy about how we try to coddle people,” says John Zikias, vice president of marketing for Thorntons Inc., Louisville, Ky. “Kids need to be guided by parents; parents need to make decisions based on lifestyle.”

Montgomery says, “If you’re a consumer and have a limited amount of money, will you buy [healthy food] where there’s no bulk [pricing], or are you going to buy something you can fill your family’s stomach with? I truly believe in the entrepreneurial spirit. If I can make money… selling produce, I’m going to do it. But if my customers aren’t looking for it, then I’m going to sell them what they want. I have an obligation to my bank to make the mortgage payment.”

And the argument by Zikias and Montgomery touches on a sensitive nerve: What if the pursuit for healthier diets is merely a noble quest with few followers?

“You cannot just work on the supply side of the equation,” says Page. “In fact, part of what we need to do is figure out ways to create the demand, or stimulate latent demand that is there. If in fact [consumers] don’t expect to find healthy food in the local corner market, you won’t necessarily shop for it there, but you will shop for chips. So the owner says, ‘Why should I carry it, if no one’s buying it?’ ”

In its report on food deserts, the USDA said that in studies comparing food intake before and after healthy options were made available, either at existing stores or through new stores, “The findings are mixed—some show a small but positive increase in consumption of fruits and vegetables, while others show no effect.” Sticking points may include merchandising, marketing and price.

“A lot of people use the excuse, ‘I’d stock healthier food, or I tried, but no one buys it.’ It’s a little more complicated than that,” says consultant Gallagher. “I don’t doubt ... it’s a reality in some places. But on the other hand, some small providers might not be that well-versed—they don’t specialize in those kinds of foods. They don’t know how to display them, or they don’t get them at the right prices.”

For example, a Hartford retailer complained about poor produce sales and high waste. As it turns out, he had the fruits and vegetables at the back of his store. After it was moved up front, sales doubled. “You can’t choose healthy food if you don’t have access to it,” says Gallagher. “We can’t preach personal responsibility if people can’t find these foods.”

Detroit FRESH’s Pothukuchi says price is also a powerful motivator: “Nutritionally dense foods tend to be more expensive than the energy-dense, highly processed foods that are high in fat, sugar and salt. Even with food stamps, it’s hard ... for families to consistently have healthy diets that include adequate amounts of fruits, vegetables and whole grains.”

To this end, while Gallagher has no strong opinion on sin taxes, she does believe that the government should stop subsidizing “nonhealthy” foods—citing, for example, the effect of corn subsidies on the low price of high-fructose corn syrup. Instead, she argues, money should be directed to subsidizing healthy options.

Zikias does not consider price an insurmountable sticking point. “We offer a great-size apple for 89 cents,” he says. “You can buy a bag of chips for $1.29, and a candy bar is $1.19. I don’t think price is always the issue. I think education is. ... People sometimes don’t think about what they’re eating.”

Jarrett Paschel, vice president of strategy and innovation for shopper research firm The Hartman Group, Seattle, echoes this. “Many times it’s repeated that eating healthy costs too much,” he says. “I think the larger problem is, for people in [food desert] areas, they wouldn’t know what to make of that.

“If you’re living on food stamps and welfare, it’s not just much more convenient, it’s easier to wrap your head around getting a cheap burger at McDonald’s than it is going to the grocery store and thinking about fixing corn chowder.” Paschel’s point: It’s not just about price or product availability. It’s about changing cultures—how people eat and how they think of food.

Here, tinkering with the food-stamp system may help. Gallagher and others have urged the USDA to further restrict the types of foods that can be bought with SNAP food benefits. Some cities, such as Detroit, reward SNAP participants who buy fresh food at farmers’ markets with additional benefits to be used exclusively on more produce.

Whatever the approach, each of the two-dozen retailers, consultants, community activists and suppliers interviewed for this story seem to agree: Lasting change in food deserts must be powered from within these communities.

“The American tendency is to drop down whatever you’re trying to do, rather than trying to figure out what the impulse is,” says Paschel. “The impulse has to be there organically. I think it could be cultivated, but I think you’d have to build it from the community upwards as opposed to having just a bunch of policy people throwing money at it.”

Corner Success Stories

Across the United States, dozens of “healthy corner store initiatives” are providing marketing guidance, distribution arrangements and merchandising support to retailers in food deserts, as well as community outreach. They include:

Philadelphia. The nonprofit Food Trust and state-run Fresh Food Financing Initiative have helped open 26 supermarkets; guided a 130% increase in food-stamp redemption at farmers’ markets; and signed up 500 corner stores in the Healthy Corner Store Initiative, which offers a small cash incentive to sell fresh produce as well as coolers for storage after a trial period.

Minneapolis. In Minneapolis, the Healthy Corner Store Program sets retailers up with a store operations manager at a local co-op to help develop a merchandising plan and get help on pricing and margins. A specialty wholesaler supplies produce-handling training. Some of the 10 participants are breaking even, while others are seeing sales increase by 50%.

Hartford, Conn. The 25 participants in The Healthy Food Retailer Initiative reserve 5% of their shelf space for healthier selections, including produce, dry grocery and frozen foods. Having a larger store footprint and being WIC-certified are the biggest predictors of success.

Detroit. The Detroit FRESH program currently assists 18 retailers in selling produce, including merchandising and marketing support, and connects them to a local distributor. After retailers show commitment—they must sell two types of fruit and vegetables—the program does community outreach, which typically helps boost sales by 15%.

So You Want to Serve a Food Desert

The decision to open a store in a food desert is seemingly fraught with risk, but the elements a retailer needs to consider are fairly basic:

Assess Demand. “You certainly want to understand the marketplace: What are the demographics and who are the people who live around it? How much money do they have to spend? What are their purchasing preferences?” says Mark Wright of Nielsen’s retail, restaurant and real estate division. Those in urban areas would need to study the area to finer levels of detail, he says, examining the population by city block, or even the ZIP+4 level.

Find a Site. As Wright says, in a built-up market, a retailer might need to consider available buildings that could support a nonstandard format, such as a 5,000- to 7,000-square-foot site without gas. Expect real-estate prices to be surprisingly high in urban areas.

Connect with a Supplier. Steve Montgomery, president of b2b Solutions LLC, says a cornerstone item in any of these areas is milk. “I would choose a distributor who is bringing me milk, vs. one who wouldn’t,” he says. Also, “I would also try to make sure I had a good sandwich offering.” He points out that a consumer in this type of market may look for bulk over quality of ingredients. While major distributors say they can supply food deserts, they discourage splitting orders—in other words, buying some product at a warehouse store, and others supplied by the wholesaler. Perfect the Assortment. “Particularly in urban areas, where populations are so concentrated, and so diverse … you may have seven different ethnicities or countries of origin within a half-mile of your store,” says Wright. “Assortment becomes much more critical in a situation like that.” Nielsen offers lifestyle/consumer segmentation tools to better understand the target audience and can build predictive models on different offerings.

Assess the Results. Here, the typical metrics apply, says Wright, citing total profitability of the store, sales per square foot, sales per employee, shrink and turns in key categories. There is a premium for ensuring the space is well used. “There is opportunity in these areas,” he says. “Think of it as an unexplored frontier in retailing. Done right, there’s money to be made and clients to be found.”

About That $400 Million …

If you’re wondering how you can get in on the $400 million through the Healthy Food Financing Initiative, there are a lot of steps between the cash and your store. That money is funneled through the USDA, Health and Human Services and the Department of the Treasury, who in turn make it available to community development financial institutions (CDFI; non-government organizations that act like an alternative lender to mainstream banks for lowerincome areas) and nonprofits engaging in a food-desert program.

Nonetheless, opportunities exist. As cited in the story, the fiscal crisis has left the agencies uncertain of how much money it has to allocate to food-desert programs, but the following are useful opportunities for c-store retailers to research.

Under the CDFI Fund, the New Markets Tax Credit Program permits taxpayers to receive credit against federal income taxes for making equity investments in lowincome communities. The credit provided to the investor totals 39% of the cost of the investment and is claimed over a sevenyear credit allowance period. At press time, application schedules for 2011 were yet to be announced; check the CDFI Fund website (
www.cdfifund.gov) regularly for updates.

Meanwhile, for communities of 50,000 people or fewer, the USDA’s Business and Industry Loan Program guarantees lowinterest loans. A retailer would visit a lender to take out a loan to do upgrades on some locations—perhaps expand shelf space for healthier foods or do some sort of promotional activity around healthy eating. The lender would then go to the USDA, who would provide a guaranteed backing for up to 90% of the loan. That provides some assurances to the lender that the loan is safe, and it encourages them to lend in instances where they might not do so. Visit your state USDA office for more details.

Other Channels Tackle the Desert

A few retailers have found opportunity attacking the food desert challenge head-on. They include:

Save-A-Lot. This no-frills value chain, owned by Supervalu, aims to open 160 sites in 2011. Focus is on low overhead: The 15,000-square-foot stores carry 2,000 SKUs, with about 70% private-label. Employees are limited to 25 per site and have multiple responsibilities. Customers do their own bagging and must buy or bring bags. About 50% of customers are on government aid. (See related story, “A Lot for a Little,” on p. 67.)

Walgreens. In August 2010, Walgreens debuted an expanded food offering at 10 sites in Chicago food deserts. This includes more than 750 new items, such as fruits and vegetables, frozen meats and fish, pasta, rice, beans, eggs, whole-grain cereals and other healthy meal components. According to spokesperson Vivika Vergara, “customer response has been very positive,” and Walgreens is “looking at opportunities to bring expanded food selection to other food deserts across the country.”

Walmart. As part of a larger effort at meeting the first lady’s Let’s Move goals, Walmart is tinkering with a 15,000-square-foot Walmart Express format. The first will open this summer in Arkansas, with plans to open dozens of sites in Chicago over the next five years, according to the Chicago Tribune. The focus will be on groceries, with some sites featuring pharmacies.

Just Deserts

First lady Michelle Obama has singled out convenience stores for selling unhealthy food to consumers in “food deserts.” To what degree do you think she’s right?

She’s 100% correct. Most c-stores offer little to no healthy foods or groceries, and can do much better. 11.8%

She’s partially right. While some c-stores do a great job providing healthy food, the rest have room for improvement. 49.7%

She’s 100% wrong. Most c-stores offer healthy foods or groceries, and the industry is being used as a scapegoat. 38.5% Source: CSP Daily News Poll. Based on 195 respondents.

Plunge in oil prices sets the stage for record margins and boost in in-store sales. Also In This Issue: Profitability skyrockets for top performers! Other channels seek to redefine convenience! The economy enters a new stage. The growing health-and-wellness trend. Fuel demand; oil's slide; multicultural momentum; and data, data, data!

Since 2003 CSP magazine has ranked No. 1 in readership and market share over all other industry publications. C-store marketers have identified CSP as the preferred magazine source for their trade marketing communications. With industry-leading, highly targeted circulation to more than 100,000 subscribers, CSP reaches the key convenience retailing decision-makers fifteen times a year.